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Rating Action:

Moody's raises ratings of CSX and Consolidated Rail Corp., senior unsecured to Baa2

17 Oct 2012

Approximately $8 billion of debt affected

New York, October 17, 2012 -- Moody's Investors Service raised the senior unsecured debt rating CSX Corporation ('CSX') and its subsidiaries to Baa2 from Baa3. The ratings outlook is stable. In a related action, Moody's raised the senior unsecured debt rating of Consolidated Rail Corporation ('CRC') to Baa2 from Baa3. CRC's rating outlook is stable.

RATINGS RATIONALE

The upgrade of CSX's ratings considers Moody's expectation that the company will sustain an operating ratio in the low-70% range and good cash flow generation through the economic cycle despite the potential for economic pressures to constrain top line growth. The rating action also considers that CSX will maintain a prudent financial policy, with dividends and share repurchases being largely funded with free cash flow rather than through incremental borrowing. The company has maintained an operating ratio (1 minus operating margin) of close to 70% since 2009, which is a significant improvement over the approximately 75% ratio that CSX maintained prior to that period. Driven by the higher margins, CSX has been able to generate operating cash flow in excess of $3.5 billion annually, which amply covers the substantial level of capital expenditures (over 20% of revenue) that CSX spends on its network. This is important to sustain the strong service levels that are necessary to support solid growth at good pricing. As a result, we expect that CSX's credit metrics will continue to map well against Baa2 rated companies: Debt to EBITDA of 2.5 times, EBIT to Interest of over 5 times, and Retained Cash Flow to Debt in excess of 20%.

Moody's believes that the operating improvements that CSX has achieved over the last several years will help to mitigate certain challenges that most Class I railroads will face in the near term. Most importantly, almost one-third of CSX's revenue is derived from its coal freight franchise, which has experienced a dramatic drop in freight volume (approximately 15% YTD through September 2012, versus prior year) due primarily to lower demand by customers in the utility sector. However, the loss of coal revenue in 2012 has largely been offset by growth in other freight segments -- intermodal, lumber/paper, and automotive in particular -- as well as continued yield (revenue per unit) growth in all freight sectors.

The ratings also take into consideration the share repurchase initiatives, which has been moderated recently after several years of an aggressive shareholder return policy. Since the end of 2009, CSX has repurchased approximately $3.5 billion of its shares -- an amount that equals almost twice the company's free cash flow over that period. CSX supplemented funding for these repurchase through use of exceptionally high cash balances at the start of this period (over $1 billion in 2010) as well as increased debt. However, although CSX's debt increased by approximately 15% over this period, the company's revenue growth at strong margins has been effective at keeping Debt to EBITDA in the 2.4-2.6 times range throughout. More recently, CSX has slowed its pace of share repurchases: only $500 million in the YTD September 2012 period, versus approximately $1.6 billion in the same period in 2011. Going forward, Moody's expects that CSX will continue to make use of share repurchase practices, but at levels that will not likely result in a material increase in leverage or reduction in liquidity. Moreover, in the event of an industry downturn, we believe that the company will reduce share repurchase activities in order to conserve capital, as it had done in the 2009 recession.

The upgrade of Consolidated Rail Corporation's rating primarily reflects the improvement of CSX's credit fundamentals. Consolidated Rail Corporation ('CRC') is a wholly-owned subsidiary of Conrail, Inc that (through so-called 'Shared Assets Areas') provides switching and terminal operations for the joint and exclusive benefit of Norfolk Southern Railway Company ('NSR') and CSX Transportation, Inc. ('CSXT'). Norfolk Southern Corporation ('Norfolk Southern') and CSX Corporation indirectly have a 58% / 42% ownership interest (respectively) and 50% / 50% voting interest in Conrail, Inc. The drivers of CRC's ratings are the lease agreements, which are direct obligations of its owners, as well as the importance of the use of CRC's Shared Assets Areas to NSR and CSXT. Moody's currently assigns its senior unsecured rating of CRC at the same level as the senior unsecured rating of CSX.

The stable ratings outlook reflects Moody's expectations that CSX will be able to maintain operating margins in the low-70% range and strong operating cash flows over the near term, even if the railroad sector experiences a short, mild downturn, with credit metrics sustained close to current levels. We expect that that the company will be able to prudently manage its share repurchase practices to meet changes in market conditions in order to preserve capital and maintain leverage roughly in-line with current levels.

Higher ratings are not expected at this time, but could be considered if CSX were to substantially reduce debt and improve operating margins, while maintaining CAPEX levels in excess of 20% of revenue. Debt to EBITDA sustained at approximately 2.0 times and Retained Cash Flow to Debt in excess of 30% would warrant upward rating consideration.

Ratings could be lowered if the company were to materially increase debt levels, possibly to fund a more aggressive share repurchase program. This would be of particular concern if such a policy were undertaken while reducing capital spending or in a manner that restricts liquidity. Debt to EBITDA of over 3.0 times, EBIT to Interest of below 4.0 times, or Retained Cash Flow of below 15% could result in downward rating consideration.

Upgrades:

..Issuer: Consolidated Rail Corporation

....Senior Secured Equipment Trust, Upgraded to A1 from A2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: CSX Corporation

.... Issuer Rating, Upgraded to Baa2 from Baa3

....Senior Unsecured Conv./Exch. Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa2 from (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

....Senior Unsecured Shelf, Upgraded to (P)Baa2 from (P)Baa3

....Subordinated Shelf, Upgraded to (P)Baa3 from (P)Ba1

....Preferred Stock Shelf, Upgraded to (P)Ba1 from (P)Ba2

..Issuer: CSX Transportation, Inc.

....Senior Secured Equipment Trust, Upgraded to A1 from A2

....Senior Secured Regular Bond/Debenture, Upgraded to A1 from A2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

..Issuer: CSX Capital Trust I

....Preferred Stock Shelf, Upgraded to (P)Baa3 from (P)Ba1

..Issuer: Peninsula Ports Authority of Virginia

....Senior Unsecured Revenue Bonds, Upgraded to Baa2 from Baa3

..Issuer: Toledo-Lucas County Port Authority, OH

....Senior Unsecured Revenue Bonds, Upgraded to Baa2 from Baa3

Outlook Actions:

..Issuer: Consolidated Rail Corporation

....Outlook, Changed To Stable From Positive

..Issuer: CSX Corporation

....Outlook, Changed To Stable From Positive

..Issuer: CSX Transportation, Inc.

....Outlook, Changed To Stable From Positive

..Issuer: CSX Capital Trust I

....Outlook, Changed To Stable From Positive

The principal methodology used in rating CSX and CRC was the Global Freight Railroad Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CSX Corporation, based in Jacksonville Florida, operates a Class I railroad in the eastern United States.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

David Berge
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises ratings of CSX and Consolidated Rail Corp., senior unsecured to Baa2
No Related Data.
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